White paper on impact of the japan earthquake on the steel industry by Beroe Inc

MARCH | 2011

Impact of the Japan Earthquake on the Steel Industry

Overview

Affected Steelmakers

The earthquake and tsunami caused widespread damage in Japan, inflicting heavy damage to roads, railways, ports, and industry infrastructure. These natural disasters also led to the outbreak of several fires and the collapse of a dam.

The earthquake and the tsunami forced some Japanese steelmakers to temporarily suspend operations on March 11. However, by March 13, many of these steelmakers resumed operations.

Nippon Steel’s Kimitsu unit was temporarily shut down The tsunami led to flooding in the Fukushima Nuclear for inspection.Two out of its three furnaces were restarted power plant, causing the failure of emergency reactors following the inspection. Nippon Steel announced that needed to run pumps that cool the reactors. As a result, the operations of its Kimitsu unit have been restored to a series of accidents have occurred in the plant, including pre-earthquake levels. The Kimitsu unit produced 5.9 hydrogen explosions, which destroyed the outer building million tons of crude steel in 2010. of reactors 1, 3, and 4, caused partial nuclear meltdowns A fire broke out in JFE Steel’s Keihin unit but has since in reactors 1, 2, and 3, and fuelled a fire in reactor 4. been extinguished. JFE Steel’s blast furnaces at its Keihin Due to radiation leakage, a 30 km evacuation zone was and Chiba units were banked initially and operations enforced around the plant. were suspended. However, the blast furnaces have started operating normally. Sumitomo Metal Industries Limited’s coke oven gas storage unit in Kashima, Ibaragi caught fire on March 11. The fire was extinguished by the next day, March 12. The unit’s two blast furnaces were blanked indefinitely and were inspected for damage. One of the furnaces was restarted on March 20; however, the second furnace is expected to take several days for operations to resume. The Kashima unit produced 5.7 million metric tons of crude steel in 2010. Tokyo Steel announced that it will restart its operations only after confirming that all of its facilities have not incurred any damage. The Kanto plain region contains 18 electric steel producers, including Tokyo Steel Manufacturing, Godo Steel, and Country Snapshot • Japan is the world’s second largest steel producing Kanto Steel. The Kanto region accounts for 400,000 country. Its production totaled 109 million metric tons metric tons of crude steel per month. The downstream industry for this production is mainly construction. of steel in 2010. • J apan is among the world’s top three iron ore importers. Electric steel mills have been affected by the power The country accounted for about 12.8% of global iron rationing implemented by Tokyo Electric Power. The production of these mills is expected to fall due to the ore shipments in 2010. power restrictions. • Japan was the second largest exporter of steel in Asia Itoh Steel’s mini mill at Ishinomaki produces 200,000 in 2010. It exported 43 million metric tons of steel. metric tons of steel a year, and Tokyo Tekko’s mill in • Japan’s five major steel producers account for about Hachinohe produces 170,000 metric tons per year. Both 80% of the country’s steel production capacity. Most of these mills were flooded. of their production bases are located near the Tokyo Bay, Osaka Bay, and Hakata Bay. • J apan is home to the world’s second largest and sixth largest steelmakers and has an installed capacity of 132.4 million tons.

Impact on Steel Markets

Country

Domestic Market The earthquake and the tsunami destroyed thousands of homes, schools, and factories. The ports in Sendai, Ishinomaki Hachinohe, and Onahama suffered heavy damage and will require months for reconstruction. The rebuilding of infrastructure in the earthquake and tsunami stuck region is estimated to cost around USD 180 billion. A projected 10% of this reconstruction cost will be for steel. Reconstruction is expected to consume 30 million metric tons of steel in the next two years. Japan’s Ministry of Land, Infrastructure, Transport, and Tourism has asked companies involved in emergency housing and kit homes to increase their production to help accommodate the nearly 390,000 people who are currently homeless. The increase in the production of emergency housing could result in increased demand for construction steel products. However, demand is not expected to pick up immediately as there is uncertainty surrounding when the reconstruction efforts will begin in Japan. Reconstruction following the Kobe earthquake that stuck Japan in 1995 started only two months after the quake hit.

Percentage of Imports from Japan

South Korea

45%

China

47%

Thailand

40%

Taiwan

44%

Indonesia

24%

Japanese Steel Market Statistics (2010) Production:

109.6 million metric tons

Exports:

43 million metric tons

Consumption:

60 million metric tons

Japan’s manufacturing output is expected to be affected in the short term due to the power rationing implemented by the Japanese government. For example, power cuts have reduced the output of the automobile industry. In the short term, the drop in output from the manufacturing industry will cause a temporary fall in the demand for steel. The country’s manufacturing industry consumes 65% of steel in Japan. However, the power rationing implemented by the Japanese government is not expected to impact the steel production of large producers. Players like JFE Steel have in-house power generating capacities to meet 95% of their power needs. Nippon Steel is 90% self-reliant in terms of its energy demand requirements. However, the mini mills that operate electric furnaces are likely to be affected by power rationing.

The reconstruction of infrastructure in Japan will require a huge quantity of steel. Once the reconstruction process begins, much of the steel produced in Japan is expected to be directed towards reconstruction efforts. As a direct consequence, steel exports from Japan will decrease.

International Market

The void which is expected to be left by the decrease in Japanese steel exports is likely to be filled by South Korean and Chinese steelmakers. South Korea’s POSCO has already been requested by South Korea’s leading ship makers to increase its production of steel by 600,000 metric tons to mitigate the risk of supply disruptions from Japan.

The significance of the Japanese steel industry is reflected by the steel imports of South Korea, China, Thailand, Taiwan, Indonesia, Singapore, and Malaysia. These seven countries imported 78 million metric tons of steel products in 2010, out of which steel products from Japan made up 31 million metric tons (about 40% of their total imports).

Conclusion The substantial overcapacity in the Chinese steel industry, which has a surplus of 100 million metric tons, along with the excess capacity of South Korea will compensate for the potential decline in Japanese steel exports. In the short term, the import of steel products for the reconstruction of infrastructure is expected to increase in Japan. However, Japanâ&#x20AC;&#x2122;s steel capacity is expected to suffice and meet domestic demand in the medium term.

Source: Steel Business Briefing,Reuters,Wallstreet Journal, AMM

Author: Badri Narayanan | Research Analyst

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